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The Lloyds Banking Group (LSE:LLOY) share value had a very good day yesterday (8 October). By late afternoon, it was almost 3% greater after buyers reacted positively to the information that the Monetary Conduct Authority (FCA) was proposing an industry-funded redress scheme to attempt to put an finish to the controversy surrounding the alleged mis-selling of automotive finance. It’s hoped that this method will keep away from prolonged court docket instances and pointless prices.
The FCA reckons lenders weren’t clear sufficient when disclosing the extent of fee paid to brokers. Of the 14.2m agreements entered into between April 2007 and November 2024, it believes 44% have been mis-sold. It’s proposing that customers obtain a mean compensation cost of £700. The general price to the {industry} may very well be £8.2bn. This estimate is predicated on 85% of these eligible lodging claims.
What are the implications?
It’s believed that Lloyds has a 20% share of the motor finance market. On this foundation, it might face a invoice of £1.6bn. That is greater than the £1.15bn provision it’s made in its accounts. But it surely’s quite a bit decrease than some earlier predictions made by others. For instance, Keefe, Bruyette & Woods, the funding financial institution, made a “conservative” prediction that the ultimate invoice may very well be as excessive as £4.2bn.
Lloyds says it’s “presently assessing the implications and affect of this session within the context of its present provision for this situation and can replace the market as and when acceptable”.
Regardless of the ultimate end result of the FCA investigation, it was at all times more likely to be a drop within the ocean for the financial institution. At 30 June, its stability sheet disclosed property of £919.3bn together with money and money equivalents of £71.1bn.
However I nonetheless don’t wish to make investments.
Warning indicators
Its share value has been on a robust rally lately, which implies the inventory has, in my view, change into costly. Extra particularly, I consider it’s pricy relative to the FTSE 100’s different banks.
Since October 2024, the Lloyds share value has risen over 45%. Its inventory now trades at 12.7 occasions historic earnings. NatWest Group is second with a price-to-earnings ratio of 8.9.
I’m additionally cautious of its nearly complete reliance on the UK financial system. Some key indicators are suggesting there may very well be bother forward for the home financial system. There’s discuss that the Chancellor would possibly impose some kind of levy or windfall tax on home banks to attempt to assist shore up the nation’s funds.
Rachel Reeves might take inspiration from Poland, which has introduced a brand new three-year banking tax to assist fund elevated defence spending. In 2026, its banks pays a company revenue tax price of 30% in comparison with 19% for many different massive firms.
A extra optimistic view
Nonetheless, brokers look like extra optimistic than me. They’ve a mean 12-month value goal of 93p — that’s round 11% greater than as we speak’s value.
After which there’s the dividend that’s more likely to entice revenue buyers. Lloyds has already hiked its 2025 interim payout by 15%. If it raised its ultimate dividend by the same quantity, the inventory could be yielding 4.3%.
However this isn’t sufficient to tempt me. Although I believe the motor finance ‘scandal’ is more likely to be put to mattress over the approaching months, I feel higher worth may very well be obtained elsewhere.
